FRANKFURT -- The prices of a key index that banks use to gauge their subprime-related losses have been damped partly by factors that have little to do with the risk that borrowers could default on mortgages, according to a Bank for International Settlements report that could add to growing concern about how markets measure the severity of mortgage-debt problems...

The Switzerland-based BIS, often called the central bankers' central bank, has few formal banking duties but is a hub for economic research and global policy makers. Its quarterly report studies a widely used measure of the subprime mortgage market called the ABX. Run by Markit Group Ltd., the ABX is an index that tracks the value of securities backed by subprime loans. Because such securities barely trade, the ABX gets direction from actively traded instruments that insure against default on the securities, called credit-default swaps. The ABX often is used as a proxy for the value of mortgage-backed securities.

Housing-market factors including the likelihood that borrowers could default on mortgages have contributed to sharp declines in the ABX since last summer. But the BIS report also says that "declining risk appetite and rising concerns about market illiquidity have provided a sizable contribution to the observed collapse in ABX prices."http://online.wsj.com/article/SB122020948016886713.html?mod=hps_us_whats_news

Saturday, August 30, 2008

Her father shot the grizzly bear whose hide is now draped over the sofa in her office. She, too, hunts and fishes. She runs marathons. She delivered her fifth child during her first term as governor. They call her husband, the reigning champion in the annual Iron Dog snowmachine race, First Dude.

Sarah Palin, Senator John McCain’s surprising selection to be his vice-presidential running mate, took Alaska by surprise, too, not long ago. Though indisputably Alaskan, she rose to prominence by bucking the state’s rigid Republican hierarchy, impressing voters more with gumption, warmth and charm than an established record in government.

It was a combination that dumbfounded her rivals.

“She wouldn’t have articulated one coherent policy and people would just be fawning all over her,” said Andrew Halcro, a Republican turned independent, who along with Tony Knowles, a Democrat, ran against Ms. Palin for governor in 2006. “Tony and I looked at each other and it was, like, this isn’t about policy or Alaska issues, this is about people’s most basic instincts: ‘I like you, and you make me feel good.’ ”

"Comes now the so-called preliminary estimate that claims second-quarter GDP grew by a much more robust 3.3%. That was hailed by the incorrigibly constructive contingent in the Street as evidence of the resiliency (favorite word) of the economy and prompted the thinned-out ranks of investors to put their worries and their plans for an extra-long weekend on hold and pile into stocks. Hooray! Hooray!

The key here is the GDP deflator, which purports to adjust GDP for the impact of inflation; it's a curious calculation in that, contrary to its moniker, it seems designed to do the exact opposite of deflating GDP.

Thus, according to this accommodating measure (accommodating, that is, if you're determined to put a good face on a dreary report), inflation grew at an improbably restrained 1.33% in April-June. And maybe it did -- but not in the good old U.S. of A. However, obviously more important than accuracy to those doing the calculating is this simple equation: The lower the deflator, the greater the growth of GDP. (see graph above)

THE ASTUTE ECONOMY-WATCHER for Merrill Lynch, David Rosenberg, also strongly advises digesting the suspect GDP report with a "very large grain of salt." Among other things, he casts a skeptical eye on how the report treats the decline in corporate profits. (We won't keep you in suspense: The answer is: "gingerly.")

More specifically, he notes, "national-account corporate profits declined at a 9.2% rate in the second quarter." For domestic industries, he goes on, profits are down 14.4% year over year.

But according to the GDP report, domestic nonfinancial profits fell at a much sharper 22% annual rate. The reason the drop in total corporate earnings was limited to 9.2% was that, David relates, profits in the financial sector, so claims the report, surged -- get this -- at a 27% annual rate.

NEW YORK (AP) -- Retail gas prices swung higher Friday -- the first increase in 43 days -- as analysts warned that a direct hit on U.S. energy infrastructure by Hurricane Gustav could send pump prices hurtling toward $5 a gallon.

Meanwhile, oil prices ended the day slightly lower, falling for a second straight session. But prices fluctuated sharply as some traders feared supply disruptions and others bet the government will release supplies from the Strategic Petroleum Reserve if Gustav wreaks havoc in the Gulf of Mexico area -- home to a quarter of U.S. crude supplies and 40 percent of refining capacity.http://biz.yahoo.com/ap/080829/oil_prices.html

We're not getting $5 gas. It just these windbags trying to get some press.

But a hurricane hit would give a lift to some of these refiners.

I'm sure some of the longs on oil, are still glued to the weather channel, hoping that a hurricane will get them out of their oil bet. We have Goldman's tout of $149 oil, a conflict with Russia in Georgia, and a hurricane, and yet oil can't get off the mat?

Obama says we won't need Mideast Oil in ten years, and Palin says she knows where to drill in Alaska.

Repurchases Routinely Give Shares a Lift, But the Effect Could Be EphemeralAugust 30, 2008

Buying high and selling low: That sounds dumb. But call it a "share repurchase program" (or stock buyback), and people get excited.

Mistimed buybacks can be deadly. In 2006 and 2007, Washington Mutual spent $6.5 billion on buybacks. In January 2007, with the stock at 43.73 per share, chief executive Kerry Killinger called the repurchase program "a superior use of capital." Also in 2006 and 2007, Wachovia sank $5.7 billion into buybacks at an average price of more than 54. Citigroup spent $8.3 billion to repurchase stock in 2006 and 2007 at share prices of about 50. In April 2008, all three banks were so capital-starved that they had to raise cash by selling shares for a fraction of what they had recently paid for them -- WaMu at 8.75, Wachovia at 24, Citi at 25.27 a share.http://online.wsj.com/article/SB122005273251785043.html?mod=hps_us_editors_picks

This is new news? You had the story here when it meant something!

Now that the 52 week low list is decorated with Investment banks, regional banks, and the money center banks, I suppose someone would ask the question: Why are banks raising capital, at these prices, at such dilution to shareholders instead of when the prices of the stocks were much higher? Well the answer is simple.

1) They now have too raise capital.2) The banks were too busy buying back stock at the highs!

Let's go from the largest to the least:

Six weeks ago, Citibank raised $4.5 billion selling 178 million shares at 25.27. Now yesterday, they saw something in the tea leaves that was different from the end of April. More and larger writedowns. Lehman just raised capital a couple weeks ago. How long before they see more problems? Well you now have their script!

Thursday, August 28, 2008

A few weeks ago, when AmBac commuted their CDO's with Citigroup, CreditSight analyst Rob Haines (who seems to be in the pocket of the short hedge funds) had this to say about the commutation:

"We think (commuting) will backfire and erode capital at an acclerated rate since both the cash used to commute contracts and the installment premiums associated with those canceled policies will head out the door. Ultimately, we believe that structured contract holder will crowd out their municipal book as they race to get as much capital as they can before a potential rehab event."http://www.bondbuyer.com/article.html?id=2008080146D32WSN

AmBac closed at $3.79 that day. Since then it has doubled. How useful was CreditSight analysis? It had zero value to the marketplace.

It looks like the marketplace is finally recognizing what even Moody's has acknowledged. Credit default swaps are treated like derivatives, so they are marked-to-market on insurers' balance sheet even though they may not have any impact on claim paying ability.

And that's why we had such hysterical crying by the short hedge fund crowd, screaming doom and gloom and the falling of the sky on the monolines.

The hedge fund boys wanted to push the insurance companies into "insolvency."

Then they could force the insurance companies to pay current market value prices because of insolvency termination clauses.

But their gambit didn't work.

Now we are hearing about more commutations led by other insurance commissioners brokering deals. And the value of the monoline insurance is already helping rates in the marketplace.

Look at the bonds of Oxnard Finance Authority and the San Pablo Redevelopment Agency. Ambac is used as a backstop, and the rate has gone down considerably on their variable rate bonds. It had spiked up to 7%, and now is at 1.48%.http://www.bondbuyer.com/article.html?id=2008082894SYJGLA

Those that thought that Ambac's Connie Lee municipal insurance was a long shot, should remember that three weeks ago, ABK said that Connie Lee could be up and running by October 1st.

With what happened to MBI today, market bears that were dismissive of Connie Lee, will now have to seriously consider it.

And with more deals in the whisper pipeline, the story on the monolines is getting much better!

(Reuters) - The Inspector General for the U.S. commodity-futures regulator has officially begun an investigation into an inter-agency report on commodity markets, the Wall Street Journal said citing a person close to the matter.

Earlier in the month four U.S. senators had sent a letter to Inspector General Roy Lavik questioning the Commodity Futures Trading Commission's role in an inter-agency task force interim report that said "supply and demand factors" were responsible for the surge in fuel prices.

The interim task-force report, which came out just days ahead of a Senate vote on the bill, said skyrocketing energy prices were the result of supply-and-demand fundamentals and not speculation.

The senators, including senior members of the Energy and Natural Resources Committee, allege that the CFTC knowingly included "seriously flawed" data and the timing was "suspicious."

AmBac goes up 41% today. Whoops! That wasn't supposed to happen. Isn't this number supposed to be insolvent?

MBIA goes up 35% today. Whoops! That wasn't supposed to happen. Isn't this number supposed to be insolvent?

Here's another whoops that the shorts wanted us to believe. That the GSE's would be recapitalized and the common shareholders would be wiped out.

Fannie and Freddie rallied 80 and 100% off their Friday lows. On Friday, there was huge buyer at Freddie at 2.50. It was pounded but the stock didn't move. The same with Fannie Mae at $4.40. He showed a bid for 100 shares and he took all that they sold. Now both of these stocks are heading to double digits, and all we hear is how they've had such a big rally. A big rally? It hasn't even started. MBI went from 4 to 8 in two months. It went from 8 to 16 in two weeks.

It's the same with the GSE's. The same folks who gave us white papers on why ABK and MBI would soon be bankrupt are the same people that said FRE and FNM were toast. So put yourself in the white shoes of these liars and manipulators with the silver tongues. When MBI and ABK have already moved 400% against you, what are you going to do with your shorts in FNM and FRE? You will cover.

And that's when the big move starts!

Here's another stock that is ready to move. Look for MGIC (MTG 7.97) to make a move to 12. This stock was held back by short sellers attempting to block it at 8. And the October 10 call options are only .55. You should be able to make 400% on your money with these in a week.

Aug. 28 (Bloomberg) -- MBIA Inc. rose in Europe after the company agreed to reinsure $184 billion in municipal bonds for Financial Guaranty Insurance Co., winning new business after losing its top AAA rating...

``MBIA wouldn't do the deal unless they thought they were going to make money,'' said Timothy Graham, who helped Bermuda- based reinsurer LaSalle Re Ltd. avoid insolvency as its chief restructuring officer. ``So, they probably got a pretty good deal.''

MBIA, which slid 79 percent in New York in the past 12 months, is showing it can survive without the top AAA rating. The company is facing competition from the new insurance unit of Warren Buffett's Berkshire Hathaway Inc. as well as Assured Guaranty Ltd. and Financial Security Assurance Inc. MBIA led bond insurers posting record losses after straying from the business of backing municipal bonds to guaranteeing collateralized debt obligations that have tumbled in value.http://www.bloomberg.com/apps/news?pid=20601087&sid=aLI0ytMoQbgc&refer=home

MBIA agreed on Wednesday to take control of nearly $200 billion of municipal bonds currently backed by a rival bond insurer, the FGIC Corporation, in a move that could help its competitor avoid bankruptcy.

The agreement between the two companies calls for the municipal bond issuers to pay their premiums in advance, transferring $741 million to MBIA. In exchange, MBIA will pay FGIC a commission worth nearly $200 million.

In February, Warren E. Buffett, the billionaire investor, said he had offered to reinsure some $800 billion worth of municipal bonds guaranteed by MBIA, Ambac Financial and FGIC. His investment vehicle, Berkshire Hathaway, proposed that it would invest up to $5 billion as capital.

Wednesday, August 27, 2008

June 18 (Bloomberg) -- Bill Ackman was right: the world's largest bond insurers aren't worthy of a AAA credit rating and may be headed for the bottom of the scale.

Ackman, the 42-year-old hedge fund manager who says he stands to make hundreds of millions of dollars betting against MBIA Inc. and Ambac Financial Group Inc. if they go bankrupt, will tell investors at a conference in New York today that losses posted by bond insurers may threaten to breach the capital limits allowed by regulators, making them insolvent.http://www.bloomberg.com/apps/news?pid=20601109&sid=ayw26W322L2A&refer=home

On June 18, ABK was $2.07. Today it closed at $5.24

On June 18, MBI was $6.15. Today it closed at $11.98.

After the close, MBIA received $741 million dollars for re-insuring FGIC public finance bond portfolio. Yes, the portfolio that Warren Buffett attempted to re-insure. And yes, the Superintendent of Insurance from New York, Eric Dinallo helped broker the transaction.http://biz.yahoo.com/bw/080827/20080827006057.html?.v=1

And off forgotten MGIC, (MTG 7.03) which was driven down by a bear raid in the last hour should get legs tomorrow too along with PMI Group (PMI 2.89) which was downgraded yesterday by S&P and anyone selling on that "downgrade" will be as late to the party as the above Bloomberg piece.

Citigroup pumps them yesterday, and Merrill downgrades them today-FNM to 5, FRE to 3. And then we have this news on FNM and FRE.

Aug. 27 (Bloomberg) -- The crisis of confidence that sent Fannie Mae and Freddie Mac debt costs to record highs above U.S. Treasuries is also providing the mortgage-finance companies with the biggest profits on new investments since at least 1998.

The current-coupon mortgage bonds Fannie and Freddie buy yield about 40 basis points, or 0.40 percentage point, more than what they pay to borrow by selling benchmark bonds, according to Citigroup Inc. The difference exceeded 20 basis points only twice in the 10 years through 2007 -- in 1998 and 2003.

The gap enables the government-chartered companies to offset some of the credit losses on mortgages they own or guarantee and eases pressure on U.S. Treasury Secretary Henry Paulson to step in with a bailout. The companies, which profit from their $1.6 trillion of mortgage investments, have tumbled more than 85 percent this year in New York Stock Exchange trading as mortgage delinquencies grow and the cost of debt rises.

``From Fannie and Freddie's perspective, there's actually better investments now,'' said Moshe Orenbuch, an analyst at Credit Suisse Group in New York, adding that their interest margin is likely to continue to widen. ``It's ironic.''

``They, at the increment, are very, very profitable,'' said Dan Fuss, vice chairman of Loomis Sayles & Co. in Boston and co- manager of the $17 billion Loomis Sayles Bond Fund. ``If they can continue to do anything close to business as usual, they are immensely profitable.''

Fannie and Freddie's holdings are shrinking at a monthly rate of about $20 billion because of refinancings, home sales and borrower defaults, according to an Aug. 21 report from New York-based Citigroup analysts Scott Peng, Brad Henis, and Brett Rose. That money can be reinvested into higher yielding securities.

That is one reason ``there is no pressing need'' for a bailout, they wrote in the report, titled ``All That Sound and Fury, Signifying Nothing New.''

The companies are also boosting fees to guarantee home-loan securities, off-balance-sheet obligations for which they don't need to borrow. Fannie plans on Oct. 1 it will double to 50 basis points an upfront ``adverse market delivery charge,'' introduced this year for every mortgage the company buys or guarantees.http://www.bloomberg.com/apps/news?pid=20601087&sid=apmMPC6KnAtI&refer=home

Same news, different viewpoints. And probably different trading positions!

Shares in Fannie Mae and Freddie Mac surged on Tuesday after Citigroup analysts said the two government-sponsored mortgage financiers could withstand losses up to the end of the year and an imminent government rescue was unlikely.

Brad Ball, analyst at Citigroup, recommended the stock of both government-sponsored mortgage financiers. Shares in Freddie rose by 22.19 per cent and Fannie was 13.10 per cent higher in morning trade, leading stock markets higher.

Mr Ball said that both companies’ stock prices were so low that the potential rewards were “attractive” if the two companies pull through the housing crisis. He said both Fannie and Freddie’s capital positions had a substantial cushion above their regulatory minimum, and their continued access to the debt markets meant the odds of an aggressive government intervention were 1 in 10. Freddie has $12.7bn of capital above the minimum requirement, while Fannie has $20.3bn, said Mr Ball, which should absorb losses for the companies to the end of the year, giving them some breathing room to raise additional capital.Citi’s comments came after Freddie Mac on Monday easily sold $2bn of short-term debt, helping to reassure stock markets that Freddie and Fannie could still fund their operations without a government rescue. Fannie Mae was expected to conduct a similar sale on Tuesday.http://www.ft.com/cms/s/0/9d24e67a-738f-11dd-8a66-0000779fd18c.html

Monday, August 25, 2008

Richard Fuld's days as Lehman Brothers chief are numbered as a plan is being hatched within the troubled Wall Street investment bank to strip him of his executive duties.

The planned coup comes amid rumours a Korean investor is planning either a sizeable investment in Lehmans or an outright acquisition of the firm.

Shares in Lehman Brothers, which have lost more than 80 per cent of their value this year because of the bank's disastrous foray into the sub-prime mortgage business, surged 12 per cent at one point on Friday as talk of an imminent acquisition gripped the market.

KDB later played down the likelihood that it is ready to swoop in on Lehman. "We are just at an early stage of privatization, and we are weak at investment banking by international standards," bank spokesman Sung Joo-yung said in an interview with The Wall Street Journal. "In the long term, we should strengthen that weakness."

...KDB's new chairman, Min Euoo-song, is a former chief of Lehman's Seoul branch and has a reputation in Korean banking as an aggressive deal maker. But to make a takeover or sizable investment in Lehman work, Mr. Min would have to persuade South Korean regulators that Lehman fits with the government's plan to privatize KDB.http://online.wsj.com/article/SB121961240063067235.html

Just take a read of this article by John Markman who now tells us that a worldwide cataclysm is ready to happen, where he recomends buying the Pro-funds double inverse short ETF's to profit from the coming disaster:

It's more likely that U.S. equities will plunge...The French market is also une grandestinque-bombe, down 22%, led by energy and banks. The Belgian market is worse, down 30%, with Germany down 24%, Austria down 23%, the Netherlands down 21% and Spain down 23%. Elsewhere on the Continent, the news does not improve. Sweden is off 23%, Russia is down 23%, Turkey is down 25%, and Greece is down 36%....How about Asia, the crown jewel of global growth? It's a wet noodle...Meanwhile, fear has gripped corporate bond investors by the throat in ways that make stocks' problems look tame...now many are trading like penny stocks...And then this gem:

SEC Commissioner Cox let the short sale rules expire on August 10 regarding the vaunted 19 financial stocks. He also promised new rules regarding shorting in the next couple of weeks.

Look for this market moving action soon, as the bears have been trying to press their bets to no avail, except for the GSE's.

The ironic part is that the bears are digging their own grave. Look at IndyMac. Now that it has been nationalized by the government, foreclosures have been stopped, and work-outs are being devised for homeowners. Forbearance of principal, modifications of loans and a cap of 6.5% interest rate on mortgages, are allowing homeowners to keep their property. This supply is being kept off of the market, as the FDIC is actually doing something with it's seizure of IndyMac. Just last week, you had full arenas in Northern FL, Orlando, and Miami with loan reps and homeowners, actually coming to terms with their mortgages and doing something besides lip service.

If Washington Mutual would hit the skids just like IndyMac, half of our housing problems would be over!

Now let's look at Fannie and Freddie. The preferreds on these numbers have already hit the skids. But does anybody think that Treasury will wipe out these preferreds with the GSE bailout? Big owners of the preferreds are banks. So Treasury will wipe them out in their bailout? Doubtful! Preferreds can be used as capital, and the buyers get a tax break. The system was designed for this "implicit" relationship and the "implicit" guarantees!

The derivative play by the bears on Fannie and Freddie's demise were the purchase of credit default swaps on their sub-ordinated debt. UBS, which lost well over $40 billion last year, had this to say:

So the thinking is, if Treasury intervenes, then Fannie and Freddie's sub-ordinated debt gets deferred, and thus those who sold the swaps get kiboshed, and do these sellers have the money to pay the buyers of this insurance?

Isn't that rich? Wall Street is supposedly buying insurance on swaps, from those who can't pay so they can cause a panic?

And here is what the WSJ had to say after Moody's and S&P downgraded their ratings:

The preferred shares that were downgraded are hybrid stock-bond securities that are supposed to pay steady dividends over long periods. That has made them attractive to banks and insurers, which have viewed them as a way to get safe returns.

The value of Fannie and Freddie preferred has dropped sharply. Fannie's Series S preferred, for example, closed at $11.29 a share on Friday, down from $15.20 a week earlier and $25.70 at the end of 2007. Fannie and Freddie's preferred shares remain on review for possible further downgrades, Moody's said.

Moody's cited the risk that the companies will have to skip dividend payments on the preferred shares if losses deplete their capital below certain thresholds. It also pointed to uncertainty about how the preferred stock would be treated if the Treasury Department acquires stakes in Fannie or Freddie. If Treasury decided to buy preferred shares in the companies to boost their capital, it could further reduce the value of the existing preferred shares.

Fannie has about $21.7 billion of preferred stock outstanding, based on the par value of that stock, and Freddie has about $14.1 billion. Those preferred shares are held by many U.S. insurance companies and banks.

Ratings Cut

Moody's lowered preferred-stock ratings for both companies to Baa3, the lowest investment-grade rating, from A1. Standard & Poor's Ratings Services recently made a more modest cut, taking the preferred ratings to A-minus from AA-minus.

What does it mean? Just that Fannie and Freddie are the "government's" Auction Rate Securities!

Eventually everyone gets paid, but first you gotta panic the holders!

And that you had better be buying the banks and the brokerages on this news. When the market is sweating the GSE's, you've hit the bottom. And instead of a panic, it will be a relief.

Remember this statement in 1962? "You won't have Nixon to kick around anymore because, gentlemen, this is my last press conference." Or how about this in 1973? "I am not a crook. I have earned every cent....I have never obstructed justice."

It's the same here. We'll hear pontifications on "moral hazard" but it won't be the last time. And unless Uncle Sam wants to be known as the crook to the world, the holders will get paid.

Thursday, August 21, 2008

Goldman's call for $149 oil on Wednesday was just laughable. See post below. So let's put that call in context. 81% of all contracts on the NYMEX are in the hands of speculators. See story below. And they need the price up, not down. So Goldman calls for $149 oil, and to sell the financials.

Instead, the financials rallied. At least we knew how this story played out before it happened!

Regulators had long classified a private Swiss energy conglomerate called Vitol as a trader that primarily helped industrial firms that needed oil to run their businesses.

But when the Commodity Futures Trading Commission examined Vitol's books last month, it found that the firm was in fact more of a speculator, holding oil contracts as a profit-making investment rather than a means of lining up the actual delivery of fuel. Even more surprising to the commodities markets was the massive size of Vitol's portfolio -- at one point in July, the firm held 11 percent of all the oil contracts on the regulated New York Mercantile Exchange.

The discovery revealed how an individual financial player had gained enormous sway over the oil market without the knowledge of regulators. Other CFTC data showed that a significant amount of trading activity was concentrated in the hands of just a few speculators.The CFTC, which learned about the nature of Vitol's activities only after making an unusual request for data from the firm, now reports that financial firms speculating for their clients or for themselves account for about 81 percent of the oil contracts on NYMEX, a far bigger share than had previously been stated by the agency. That figure may rise in coming weeks as the CFTC checks the status of other big traders.

Some lawmakers have blamed these firms for the volatility of oil prices, including the tremendous run-up that peaked earlier in the summer.

"It is now evident that speculators in the energy futures markets play a much larger role than previously thought, and it is now even harder to accept the agency's laughable assertion that excessive speculation has not contributed to rising energy prices," said Rep. John D. Dingell (D-Mich.). He added that it was "difficult to comprehend how the CFTC would allow a trader" to acquire such a large oil inventory "and not scrutinize this position any sooner."

The CFTC, which refrains from naming specific traders in its reports, did not publicly identify Vitol.

The agency's report showed only the size of the holdings of an unnamed trader. Vitol's identity as that trader was confirmed by two industry sources with direct knowledge of the matter.

CFTC documents show Vitol was one of the most active traders of oil on NYMEX as prices reached record levels. By June 6, for instance, Vitol had acquired a huge holding in oil contracts, betting prices would rise. The contracts were equal to 57.7 million barrels of oil -- about three times the amount the United States consumes daily. That day, the price of oil spiked $11 to settle at $138.54. Oil prices eventually peaked at $147.27 a barrel on July 11 before falling back to settle at $114.98 yesterday.http://www.msnbc.msn.com/id/26321642

Wednesday, August 20, 2008

And that's the story of the market today. The Shanghai market closed at 2523.28 up 178.81 up over 7% today! Yesterday, after the close Goldman Sachs downgraded the investment banks, and cut estimates almost across the board. This morning, Goldman gave a $149 a barrel year end target for oil.

It's the same story being played out. The short financial, long energy trade. Energy can bounce here, but the play is in natural gas which is too cheap at $8. (UNG 37.39), the natural gas ETF, and Chesapeake Energy (CHK 46.92) are the play on gas. Oil bouncing? Before you tout a target of $149, let's see if oil can get thru $121. I even doubt that! But the changes in China and the bottom which is now in, in that market, means Goldman's bearish call on the financials won't amount to much, and neither will their pump on oil.

And the $35 million that they paid isn't new news either. You had that story in the WSJ on November 6. That was the total amount that was overbilled in Medicaid. And that's all the Fed had. This information was available last year. But if an investigator doesn't have anything but what is already known, the rule of the investigation is too just drag it out to make it painful.

And now, WCG can't get the multiple expansion, because the market for healthcare stocks is vastly different than when the stock was at new highs.

Monday, August 18, 2008

Battered US financial groups will have to refinance billions of dollars in maturing debt over the coming months, a move likely to push banks’ funding costs higher and curb their profitability, say bankers and analysts.

The banks’ need to raise capital to offset mounting credit-related losses is forcing them to pay higher interest rates to entice investors..

Mohamed El-Erian, co-chief executive of Pimco, the asset management group, said: “If banks keep borrowing at these levels, you will get a repricing of credit for the whole economy.”

Adding together 10 of the biggest bank borrowers, Dealogic said that maturing bonds total $27bn in August, $52bn in September, $23bn in October, $20bn in November and $86bn in December. The extent of the scramble for funds became clear last week when banks tapped central lending facilities, with strong demand for one- and three-month money lent by the Federal Reserve and the European Central Bank. US commercial banks borrowed a record daily average of $17.7bn from the Fed last week.http://www.ft.com/cms/s/0/e15201ce-6c7e-11dd-96dc-0000779fd18c.html

Watch rates go down, not up in this scenario. The market is smart enough to know how weak the economy is, and that higher rates would kill it. And the banks need the lower rates to refinance their debt. And they'll get it.

Just like our economy needed lower oil. They got it. And now we will get lower rates.

The message is that "if our firm is in trouble, we would rather fund ourselves than fund you [hedge funds]", said a brokerage executive with knowledge of the arrangements. He added: "We would only use it if there were a real issue."

Morgan Stanley is essentially tying its promise to provide financing to hedge fund clients to the prices of credit insurance on its own debt. If the cost of the protection rises to a certain level, that would trigger a reduction in Morgan Stanley commitments to hedge funds. Goldman Sachs is understood to have a similar arrangement that uses its bond prices as a reference point for credit commitments to hedge fund clients...

Morgan Stanley's use of the credit insurance market as a basis for lending decisions underscores the extent to which the derivatives market has replaced rating agencies as the final word on creditworthiness. It could lead to more scrutiny of the reliability of the credit insurance market.http://www.ft.com/cms/s/0/4f84f56c-6c8d-11dd-96dc-0000779fd18c.html

It would also prevent some of the ridiculous prices on swaps that sometimes exist!

Sunday, August 17, 2008

A year ago, the mantra was to short the small caps. The theory behind this was that in an economic down cycle, these stocks would get crushed by their larger and better capitalized companies. What happened? Here's some highlights from a WSJ article:

Since July 15, the Russell 2000 small-cap index is up 13.7%. Those stocks have an average market capitalization of $1.1 billion. In comparison, the Standard & Poor's 500-stock index has climbed 6.9%.The performance gap between small and large stocks is even wider since the start of 2008. The Russell 2000 is down 1.7%, while the S&P 500 has tumbled 12%, even though small-cap stocks entered bear-market territory months before the S&P 500....Much of the fuel for small stocks is coming from the mass-reversal of bearish bets by hedge funds, many of them closing out their positions to lock in profits. And since small-cap stocks can be thinly traded, a rush of traders buying back stocks during the summer, when volume typically is light, is increasing the Russell 2000's move.In the spring, nearly 11% of the shares of stocks in the Russell 2000 were sold short, Mr. DeSanctis says.... In late June, short interest on a widely traded Barclays exchange-traded fund that tracks the Russell 2000 was nearly triple the number of shares outstanding, up from roughly even in January 2007.http://online.wsj.com/article/SB121900598984147701.html?mod=hps_us_whats_news

We are seeing the unwinding of bad bets made in every facet of this market. Small caps that were supposed to go down, go up. Oil that is supposed to go up, goes down. Financial stocks that were supposed to go down, go up. Commodities that were supposed to go up, go down. Monoline insurers that were supposed to go bust, break-out.

Now if all these conventional wisdom is proven wrong , why does everyone still believe the conventional wisdom that home prices are still going to go down? Because Greenspan says so?

They're not.

They are going to go up, but Wall Street can't get a handle on the foreclosure data. But they don't want to. That would kill the bearish thesis.

And nobody that is short, wants to cover.

But they'll cover when they have to, and not when they want to.

A perfect example is in Barron's this weekend, with the interview with Eric Sprott of Sprott Asset Management.

Regarding the price of oil he says, "Long-term, up... almost forever. What it goes to, I don't know. But I can see it hitting $200 or $300 or $400 a barrel. And if oil goes up, it will drag most other energy-producing products with it."

And with that thesis he said this about the stock market:

We're in a secular bear market, and there are lots of things that might go down for quite a long period, especially if oil starts rising again. Just imagine oil at $200. What happens to the airline companies, car makers, mobile-home companies, destination-resort companies, casinos, retailers?

He also brags about all the financials that he's short, not mentioning that they have moved 40 to 80% in his face in th elast month.

He said the dollar should be weaker. Read my previous post. How right has that been?

But he got his play in Barron's. And he's a good trader and a good tout. Their funds owned over 17% of Timminco, a stock that touted cheap silicon for solar cells, and the stock went from a buck to 30. It's been more than cut in half the last month, as their silicon costs are still 3x what they have expected. But most of Sprott's funds, found the exits in the stock before it cratered, even though he said the stock was heading to 70!

Check back in five years? These macro stories change when the positions do or when the pump is over! And with 80% of his stocks that he owns in commodity related numbers, anyone listening to his Barron's pump could get Timmincoed!

So Goldman gets the charts and the fundamentals wrong on the dollar, but now get's credit for calling the bottom after it already happened!

Wasn't it also Goldman Sachs that said "speculators" weren't responsible for the rise in oil?

We believe there is a fundamental misperception among many in the oil industry, Wall Street, the media, politicians and the general public that so-called 'speculators' are driving up the oil price to supposedly unjustified levels.

"Unfortunately, we do not think the energy crisis will be solved by finding and punishing the big, bad speculator.

But Goldman had plenty of company being bearish on the dollar and bullish on oil. Just take a look at some of these figures from the hedge funds the last couple of months. Yes, those Masters of the Universe that said oil was heading to $200 and our dollar was confetti:

July was the worst month in eight years for the hedge-fund business, according to Hedge Fund Research, a Chicago firm that tracks the business. Funds lost 2.8% on average, worse than the 1% drop in the Standard & Poor's 500, according to the firm. So-called macro hedge funds, which bet on broad trends in the dollar, commodities and other areas, were the biggest losers, dropping 5.5%. The losses appear to be continuing: The funds are down another 3.7% so far in August, bringing the six-week loss to more than 9%.

"Hedge funds have maintained exposure to commodities and global currencies" despite the recent falloff in commodity prices, says Ken Heinz, president of HFR. "Those were a big part of the gains for these funds for the past year, but now it's costing them."

Among the hedge funds losing money lately: New York-based Jana Partners LLC's flagship $5 billion fund, which entered July up more than 4% for the year, fell 9% during the month, hurt in part by falling prices of energy stocks. The Ospraie Fund has declined by more than 20% this year due to commodity bets, dropping 13% in July alone.http://online.wsj.com/article/SB121884105817145699.html?mod=googlenews_wsj

Anyone think more than a few of these guys are blowing up again? Unlike Goldman Sachs, these guys don't have the luxury of knowing the positions of everyone that clears through them.

Maybe that's why the hedge funds with the same strategy, suffer worse than Goldman.

Goldman get's the heads up on who panics first!

Remember the daytraders that used to try and scalp a few fractions by trading in front of large orders? Now those orders are all broken up and dispersed throughout the day. Where are the daytraders now?

Friday, August 15, 2008

Data emerging on players in the commodities markets show that speculators are a larger piece of the oil market than previously known, a development enlivening an already tense election-year debate about traders' influence.

Last month, the main U.S. regulator of commodities trading, the Commodity Futures Trading Commission, reclassified a large unidentified oil trader as a "noncommercial" speculator.

The Task Force’s preliminary assessment is that current oil prices and the increase in oil prices between January 2003 and June 2008 are largely due to fundamental supply and demand factors....Task Force’s preliminary analysis to date does not support the proposition that speculative activity has systematically driven changes in oil prices.

Why wouldn't they take this position? The want the volatility and the action that the speculators provide.

Much of the attention related to participants in futures markets has focused on the role of commodity index investment funds and the commodity swap dealers that often act as their intermediaries... Some observers have suggested that this rapid inflow of investments through index funds has been a cause of oil price increases...The CFTC has issued Special Calls for data about this activity, but only partial responses have been received as of the date of publication of this interim report. An analysis of the data from these Special Calls will be made available in September.

So they publish the report saying that speculators don't influence the data, but they don't have the data on the speculators position until September. Instead they inudate the public with statistics like this:

World surplus production capacity remains low (the estimated 1.35 million barrels per day in June 2008 is equivalent to less than 2 percent of consumption, an amount well below the 1996-2003 annual average of 3.9 million barrels per day). The combination of these factors means that prices react strongly to actual or perceived supply disruptions.

The speculator with 460 million barrels of oil, could of been taking down the excess capacity of 1.35 million barrels for 340 days in a row. Wouldn't that affect the price of oil? It would surely affect the perceived supply wouldn't it? Instead the CFTC talks about Nigeria, Iraq or Iran. As if they actually have reliable data on them!

Oil exporters suffer a decline in the purchasing power of their revenues when the dollar depreciates. To defend their international purchasing power, these producers could, in principle, seek an offsetting increase in the dollar price of oil by curtailing supply.

Oh really? Who determined that linkage? What happened to the dollar lately? Let's say that we transact 86 million barrels of oil at $80. That's $6.88 billion dollars. 86 million barrels of oil at $126 a barrel gives us $10.88 billion dollars. Now we have $4 billion more dollars on a daily basis going to pay for oil. Does anybody think that affects the currency? But the report won't say that. Instead it said this:

This widening may have exacerbated concerns about the sustainability of the current account deficit, thereby putting downward pressure on the dollar.

The economic legalese of obfuscation. Bivariate regression by Granger Causality testing proves their position. I could of written this report in my sleep. In fact, I should be sleeping now. I guess I'm just writing my rebuttal in my sleep.

But do you think the floor traders are reading this? All they are now doing, is shorting every rally in oil. They see the money flows when the price of oil was being rigged, and now they see the unfolding of the bet. But the fundamentalists what a reason.

On NASDAQ's figures, they show that Berkowitz's Fairholme Capital owned 9 million shares. However, the latest SEC filing by him showed that he actually has 16,110,090 shares. Throw that in, and now we have 20% dilution in SHLD by the shorts.

Sears has 37.3 million legal shorts on the stock. At it's current price of 93, $3.5 billion is bet against Sears by the shorts. And Sears isn't an isolated case.

Who is naked in Sears?

Who is naked on the street!

So these shorts that pretend they don't have a problem, have a huge problem. I've said that the banks will be back to old highs even though their earnings will be only 60% of what they earned before.

So where are you going to put your money? The US led the world into the housing recession/depression and they will be the first out of it. It is happening now. And the money is coming into our markets, and our dollar, as this cardinal fact is recognized by the world.

But not by the bears. They are to busy talking about events in the rear view mirror!

All they talk about is banks and housing. Get over it. It's not the Sistine Chapel, or it's not the Mona Lisa, or it's not the bible.

But let's take a look at housing.

Maybe the bears disregard Bob Toll and his latest conference call. Three years of pent up demand in housing. Maybe they don't look at the sale increases in Florida or California. Or that in 13 out of 50 metro areas housing prices actually increased. Maybe the bears haven't seen the multiple offers on short sale properties. Maybe they haven't been to FL and seen the stream of buyers looking through pre-foreclosure sale. They would just as soon believe the bearish prognostications of of Roubini, and be entertained by Mr. Mortgage on YouTube! These bears are just rubberneckers!

But they will be wrong. Just like the bears on the automobile industry. Has anyone checked out prices on SUV's lately? These aren't affordable? My brother just picked up two F150 quad cabs for his business that retailed for 50K. He picked them up for 35K. My sister just picked one up for $10,500 that booked at $17,000. Maybe the bears think that prices don't matter, but they do. And now they mistakenly assume that these inventory clearing prices in homes and autos will stay around.

Stay around? They'll soon be gone! And so will those prices.

I've seen pre-foreclosure homes with multiple bids, and 50 couples trampling through an open house in Florida. You have all these Wall Street types putting funds together to buy distressed merchandise, yet Wall Street thinks that the average American won't buy a house on sale.

When things are cheap, inventory moves. I called up a large dealer to pick up some Palladium Maple Leaf coins today, now that Palladium has fallen from $585 to $310. He didn't have any inventory to sell. So I went to my second source: https://online.kitco.com/bullion/index.html

Click on it. They were out of stock also. Lower prices brings out demand.

Now in the market, we have had shorts, pressing their bets, because only on Wall Street, does lower prices scare people, and bring out supply. But that game is now over. Money is shifting here, and the shorts are understanding their games are no longer working. Maybe Wall Street doesn't quite see it yet, but I do.

I just have to dilute it in information so they'll miss it!

Then it begs the question. Where are they going to get the stock to cover their shorts? From another short hedge fund? Maybe they can get it from an owl. From who?

See that's the problem. Owls hunt by themselves and in darkness. They don't share the same playbook. And they are far-sighted. The bears are so short sighted they can't see past the next day.

But the most famous "Who" is Horton. And isn't he an Elephant? And isn't there an election coming up? Did the bears already discount the effects of that?

But he said in effective "run-off," it seems likely that the companies will generate large amounts of cash and large amounts of favorable tax attributes, even assuming a reasonable worst-case basis in which claims prove to be two or three times larger than what they have allocated for reserves...."One of the most favorable characteristics of insurance companies, such as Ambac and MBIA, is the relative ease of exit from present activities, combined with the ability to employ resources elsewhere," said Whitman.http://www.reuters.com/article/marketsNews/idINN1439504820080814?rpc=44

The stock was up nicely on the day and was trading at $4.5 and twice in the last hour, they had indiscriminate selling taking the stock to $4. That to me was a short defending their position. It won't work. This news tonight on the monolines will make all these numbers pop, and pop nicely tomorrow.

Sandisk is trading at 15, with a market cap of $3.37 billion, with almost $2.5 billion in cash. Is the takeout value of this company worth more than it's current market cap? A week ago today, Cramer ended his show telling people to sell the banks, right before the huge rally. Now he's screaming he doesn't have any tech. Which means you have to start to take some positions in at least a couple of names.http://aaronandmoses.blogspot.com/2008/07/short-squeezers-gored.html

Sandisk (SNDK 14.57) traded 24 million shares today, after 48 million shares yesterday. The Sept 15 calls closed at $1.15. It's a cheap way to play the recovery in flash.And with the amount of cash on SNDK's balance sheet, it's also a cheap enough stock that someone could start a buyout rumour.http://aaronandmoses.blogspot.com/2008/07/sandisk-play.html

So two tech stocks with decidedly higher enterprise values than their current stock price, with decidedly negative Wall Street analysts, with huge short positions, and with charts and stock action that indicate a bottom has been put in are SanDisk (SNDK 15.24) and Garmin (GRMN 37.83). They are worth a look. And unlike Oz, when you peel behind the curtain, they look better than they appear! Especially if you like to sleuth!http://aaronandmoses.blogspot.com/2008/08/enterprise-value.html

The September 15 calls closed today $3.15. A triple from when I mentioned it.

But here's the story on the stock. There were takeover rumors that Seagate was interested in buying SanDisk:

It's not what you think. It's not another trillion of losses. That's the most over hyped figure in the history of finance. If I see another talking head on CNBC saying that we are in a "bear market" rally, and we have another trillion of losses that the banks will have to take, I think I will just about gag.

Trillion in losses? How about the trillions of dollars that are short equities here in the US?

How about those trillion?

If we estimate that we have $3 trillion short, and that the markets are going to have a 33% gain in the next twelve months, then that's a trillion worth discussing.

Because that trillion comes from the bears' backs.

The trillion that helps right equity markets in the US.

The trillion that goes into 401K's.

The trillion that helps consumer confidence.

Talk about that trillion. At least, then you are talking about reality.

Not this fake trillion of losses that the talking heads spouse.

That's the trillion you should remember everytime one of these wolves in sheep's clothing comes on the tube.

And while we are talking big numbers, when are the sovereign wealth funds going to deploy some of their trillions of dollars into stocks?

I guess T. Boone changed his tune. The Oklahoma State University Cowboy said oil wouldn't hit $100 in his lifetime. I begged to differ!

It was just a couple of months ago that T. Boone Pickens said that "we'll never see $100 oil again in our lifetime."And for all those that think oil predicting is just for "cowboys" I'll give T. Boone a prediction he can live with.We'll see $100 oil before Oklahoma State University plays Houston on September 6 at T. Boone Pickens Stadium!http://aaronandmoses.blogspot.com/2008/08/oil-going-under-100-barrell.html

Aluminum Co of China (ACH 22), China Southern Airlines (ZNH 16.45), Huaneng Power (HNP 29.58), Guangshen Railway (GSH 21.79) and China Life Insurance (LFC 53.15) is a good basket if you don't want to play an ETF.

This market has no memory. The last two days they slammed the Investment Banks. Morgan Stanley was hit from 46 to 40, and can be picked up under 40. With weak claims, and backward looking inflation numbers, the market will look forward to lower interest rates.

Why lower?

Because this is the news headlines bandied about everywhere:

Consumer prices shot up in July at twice the expected rate, pushed higher by surging energy and food costs. The latest surge left inflation running at the fastest pace in 17 years...That inflation surge presents a major problem for the Federal Reserve, which could be forced to start raising interest rates even as the economy struggles to avoid a recession.http://biz.yahoo.com/ap/080814/economy.html

Anyone want to believe this? Anyone think the news outlet has the story right? By the end of the day, they'll have another story!

Another play is the West Coast refiners. Margins for gasoline for Costco on the West Coast have been terrific. Which means that the shorts in Western Refining (WNR 9.23) may get the itch to cover.

Greenspan was quite bearish on housing in the WSJ yesterday. Let's take a look at the maestro pontifications on housing before he was employed by in consulting gigs with bond house PIMCO and Deutsche Bank:

Home prices in the U.S. are likely to start to stabilize or touch bottom sometime in the first half of 2009," he said in an interview. Tracing a jagged curve with his finger on a tabletop to underscore the difficulty in pinpointing the precise trough, he cautioned that even at a bottom, "prices could continue to drift lower through 2009 and beyond."

Why are we supposed to listen to Greenspan now? It's because the spreadsheets and charts now tell him!

His desk, couch, coffee table and conference table are strewn print-outs of spreadsheets and multicolored charts of housing starts, foreclosures and population trends siphoned from government and trade association sources.http://online.wsj.com/article/SB121865515167837815.htmlDidn't Greenspan have these spreadsheets before in his well-windowed, oval-shaped office?

And didn't Greenspan tout the "teaser rate" before rates were increased 17 times?

While borrowers can refinance fixed-rate mortgages, Greenspan said homeowners were paying as much as 0.5 to 1.2 percentage points for that right and the protection against a potential rate rise, which could increase annual after-tax payments by several thousand dollars.

He said a Fed study suggested many homeowners could have saved tens of thousands of dollars in the last decade if they had ARMs. Those savings would not have been realized, however, had interest rates shot up.

The eurozone economy has contracted for the first time since the launch of the euro a decade ago, with France hit unexpectedly-badly by high oil prices and deteriorating global conditions.

Gross domestic product in the 15-country region fell by 0.2 per cent in the second quarter, reported Eurostat, the European Union’s statistical office. That marked a sharp turnaround from the first three months of the year, when GDP expanded by 0.7 per cent....

Fears of a technical recession – two consecutive quarters of negative growth – are widespread across the eurozone. Jean-Claude Trichet, president of the European Central Bank, warned earlier this month that the second and third quarters would be “particularly weak”.

That's the group think that exists in this marketplace, where we constantly have big bets going bust by the billionaire boys club, and the fast money trading hedge funds. And every time we see stock or commodity prices move, some pundit reports this as though the movements are news!

These three guys controlled 130 million shares of Yahoo. Let that sink in for just a minute. 130 million shares of a second rate Internet company? What would these guys do if they really liked something? Now these are the billionaires that follow the rules. How about the hedge funds that don't?

And that's this market. We have swings that are reported to be "related" to fundamentals, when they are just related to supply/demand imbalances caused by bets blowing up in someone's face.

Who was buying the stock at 119? Just find out who was short on the bad bet! It's not any tougher than that. (But MGM which I banged out Monday at 38, was a buy on the close today at 32.)

Now look at the action in the financials today. We had three analysts get negative yesterday-Meredith Whitney, Mike Mayo, and Dick Bove. But the stocks had rallied to far. Now in two days they have already corrected enough in the sell-off that we always get during expiration week. Now GS, BAC, MS and JPM can rally into option expiration.

It wasn't that the analysts just came up with a new piece of material that was so outstanding. They didn't. It was just that they are smart enough to time their news when the market is vulnerable.

Now remember how the billionares lost money on Yahoo? Well look at the games that the fast money crowd was playing with SunTrust (STI 39.92). Some clown bought almost 10,000 of the August 35 puts for .15 cents, and rumors were whispered everywhere on this number. So if it opens down tomorrow, or sells off in the first hour, it's a buy, because you have someone pressing a bet, and spreading a rumor. They need the stock down, and this market won't cooperate.

SEC Chairman Christopher Cox characterized the order as a precaution against rumor-driven market turmoil, and the SEC had the rule take effect July 21. The order, which expired at 11:59 p.m. EDT Tuesday, required short sellers to borrow or arrange to borrow shares in advance of short sales in the 19 targeted stocks.http://online.wsj.com/article/SB121859398601235661.html

The market is so difficult for so many people, because people try and match the fundamentals they see in the economy with the stock prices they see on Wall Street. And Wall Street just spins the story depending on where the money is going.

Remember back when Maria was known as the "money honey?" Remember back when she would always breathlessly intone, "how's the flow?" or "do you see any conviction?" Doesn't that seem like so last year already?

Look at oil. On the way up, all we heard about was production shortages. Now all we hear about is "demand destruction." Remember the peak oil theorists? Peak oil was like Level 3 assets on banks books. No one supposedly knew what Saudi Arabia's oil fields consisted off. What was good and what wasn't. What was sweet, was was sour. What was in decline, and what wasn't. And nobody knew how much water was being pumped in the wells to get at the oil. (More water increases the pressure of the reservoir, and that pressure increases the odds that the reservoir pressure will ultimately collapse.) And the majors? Well they needed their books of "reserves" to be audited also.

Now look at the banks and brokerages. The "money honey" on them has been Meredith Whitney. Will she soon have Maria's fate? Will she be shilling books with Ted Simmons? Now that's doubtful! But she can be right on the fundamentals on wrong on stock prices. That "story" is over.

No one wants to believe the housing crisis will pass. But the banks pricing mechanism is different from a homeowner. What's $200K worth to a bank, especially if you can get a net interest margin of 3%, and leverage it 10X? So who needs the housing inventory? So just blow it out.

But just like we had a resolution to the Auction Rate Security crisis, we'll have one in homes.